FUNDAMENTALS OF

ACCOUNTING
LECTURE NO.4
SECTION C & D
4-NOV-2020
The Accounting Equation

Assets = Liabilities + Capital

This equation is called the ‘Accounting Equation’, the ‘Basic Equation’, or the

‘Balance Sheet Equation’

Example No.1
The transactions of Wahab Company are listed below. For each transaction you are to determine
the effect on total assets, total liabilities and owner’s equity. Prepare your answer in tabular form.
Identify each transaction by letter and using the symbol (+) for increase (-) for decrease and (NC)
for no change.

(a) Mr. Wahab invests cash in the business.

(b) Purchase a car on account.

(c) Paid a liability of the business.

(d) Owner withdraws cash from the Business.

(e) Borrowed a loan from the united bank limited.

(f) Cash received from customer.

(g) Purchased office stationary for cash.

Solution:

Transactions Total Assets Total Liabilities Owner’s Equity

G
Business Transaction
Transaction means give and take.
All the business events are called transaction.
Or
Value exchange between two or more parties called
transaction.
Accounting System
■ Single Entry Accounting System
■ Double Entry Accounting System
Double Entry Accounting System
Every business transaction has two fold effects. They
may be that the both effects are increasing, both are
decreasing or one is increasing and other is
decreasing. But it is necessary that one is on the
debit side and other on the credit side.
This universal recording system is known as Double
entry accounting system.
 Cash Account

Debit Credit

Dr. Cr.
Rules of Debit and Credit
Example:
Purchase furniture for cash Rs. 50,000
Furniture

Cash
Furniture ► Asset ► 50,000 ► Increase

Cash ► Asset ► 50,000 ► Decrease

Furniture ► Asset ► 50,000 ► Dr.

Cash ► Asset ► 50,000 ► Cr.

Mr. Wahab Paid Salary to his staff
10,000

Cash ► Asset ►Cr.

Salary Expense ► Expense ► Dr.
Rules for determining Cash or Credit Transaction
■ Cash purchases, Cash sales and all transactions where the word
“paid” is mentioned are to be treated as cash transactions.
– Salary Paid, Goods sold on Cash
■ When a personal name or the name of a firm or the word “on
account” or “on credit” is mentioned in the transaction, it will be
treated as credit transaction.
– Goods sold to Mr. Farhan for Rs. 50,000
■ When both Cash and personal name are mentioned in the
transaction, it will be treated as a cash transaction.
– For example: Goods sold to Mr. Amir for Cash Rs. 10,000